There’s a lot of misinformation out there about credit scores and what can bring them down. Most people are really concerned about this, and the myths that circulate almost border on the superstitious.
They include taboo things you’re not supposed to do with your credit, rituals that are supposed to help boost your score, and flat-out falsehoods about how your credit score works.
Let’s cut through the noise and get to the truth about your credit score. Here’s what you should know — and the myths you need to bust.
What to Know About Your Credit Score
Your credit score is a metric that financial institutions like banks, credit unions, and mortgage lenders use to evaluate how “creditworthy” you are. Your score is supposed to indicate how likely you are to repay (or default) on money you borrow through a loan or put on a revolving line of credit.
When you apply for a loan, mortgage, credit card, or other type of financing, the lender or institution will pull your FICO score to determine that creditworthiness factor. The better your credit score, the more likely the lender will offer you the lowest interest rate available since they feel confident you’ll repay your loan on time and in full.
The lower your score, on the other hand, the more likely you’ll have to pay a higher interest rate. The interest rate is like a fee that you pay for the privilege of borrowing money and repaying it back over time. The lender will require you to pay a higher fee if your credit score is low because, statistically, they’re taking on more risk by allowing you to borrow money.
Credit scores range from 300 to 850, with anything over 800 being considered the best-of-the-best, and anything falling below 629 as bad or poor. Getting your credit score in the 700s is the goal for most people, as that will help land you in the good to excellent range.
But don’t panic if you’re not there yet.
The Biggest Myth of All? Your Credit Score Is Not the End-All Be-All
Yes, a good credit score is important and increasing your score (or maintaining it in the 700 to 800 range) is a worthy goal. But no one is giving you a gold star or cutting you a check if your credit score is good to excellent; it just means you might have an easier time getting approved for financing.
You’ll also pay less for financing when you need it — but if you don’t have much of a need for new credit or loans, a lower credit score probably won’t impact you very much. Plus, with a little time, you do have the power to raise your score so it’s in a better place when you do want to consider a loan for something like a new car or mortgage.
Some of the best ways to improve your credit include:
- Making all payments on existing accounts and balances on time and in full.
- Avoiding opening and/or closing a lot of accounts all at once.
- Repaying existing loans and wiping out balances.
These tips bring us to the other 3 credit score myths that you need to bust, before they lead you to do something silly or even harmful to your credit.
What You Only Think You Know About Your Score Can Hurt!
If you’re believing one of these 3 mistruths, it’s time to get the facts straight and understand what truly impacts your credit… and what’s little more than financial legend.
Myth 1: Checking Your Own Score Will Hurt It
You might have heard that having someone pull your credit will cause your score to drop. This is only partially true, and only in certain situations.
Credit checks come in two flavors: hard inquiries and soft inquiries. Soft inquiries do not hurt your score. Checking your own score counts as a soft inquiry, as does getting something like preapproval for a mortgage.
Hard inquiries, on the other hand, can ding your score — but they’ll usually only drop that score by 5 points or so, and your score can recover over a period of time if you continue practicing smart credit management habits.
Hard inquiries are required when going through a financing or underwriting process. They’re unavoidable at times. Just make sure that if you need to have multiple hard inquiries into your credit (such as when comparing quotes from various lenders), those institutions pull your credit at the same time.
Hard credit checks done within a small window (usually 14 days, but sometimes up to 45) will only count as one inquiry rather than several.
Myth 2: You Need Different Types of Credit to Have a Good Score
You might have also heard that your credit score is partially determined by your “credit mix,” or how many different types of credit you have.
While showing that you can manage different types of credit — like revolving lines, such as credit cards, along with installment loans, like a car payment — does factor into your credit score, it is not necessary for you to have various loan types in order to get a good credit score.
Making your payments on time and in full weighs far more heavily in the calculation of what your score should be, so this should be your main focus. Another factor is credit utilization, which means the amount of credit you use versus the amount of credit you actually have. You want to use no more than about 30% of your available credit at any one time.
Focusing in these areas will help you boost your score over time. Don’t think you need to take out something like a personal loan just to improve your credit score; you can build your score through other ways that won’t cost you money (via the interest you have to pay on a loan you don’t even need).
Myth 3: Carrying a Balance Helps Your Credit
On a similar note, carrying a balance on your credit card will not help your credit score. In fact, it can hurt, considering that your total balance amounts are a factor in determining your score… and if that total doesn’t go down over time, it doesn’t reflect well on your ability to manage credit and debt.
Carrying a balance only causes you to pay more in interest. Again, focus on other, productive ways to build credit and boost your score, like keeping credit usage lower than 30% of what you have available and never missing payments.
Conclusion
Your credit score is an important piece of you overall financial well being. Knowing what really makes positive (or negative) changes to it is smart. However they are many more critical parts of your financial health (such as spending, saving, investing) that should be given a much higher priority.
